Abercrombie spread targets key level
David Russell | email@example.com
optionMONSTER's Heat Seeker monitoring program yesterday detected the purchase of about 4,248 March 52.50 calls for about $3.92 and the sale of 8,496 March 57.50 calls for $1.97. Volume was more than twice open interest at each strike before the trading began, indicating that these are new positions.
The trader collected a credit of about $0.02 and now has a highly leveraged upside position with this vertical spread. He or she will earn pure profits for every cent that the retail stock climbs above $52.50 during the next 5-1/2 weeks, but only up to $57.50. Gains will erode above that level and turn to losses over $62.50.
The trade is also known as a ratio spread because twice as many contracts were sold as the number bought. That increases leverage by lowering the cost basis but creates the risk of losses if the shares move too far in the intended direction. (See our Education section)
ANF was up fractionally yesterday at $50.92. It's been running higher since a strong earnings report in November and is now close to the bottom of a bearish price gap in late 2011. The stock had traded for about $57 before that drop, and yesterday's ratio spread is betting that it won't go above that level.
Total option volume was quadruple the daily average in the session, with calls dominating the activity, according to the Heat Seeker.